What would a second stimulus package look like?

Stimulus II

The big-budget summer sequel everyone is talking about!

Rumblings about a second stimulus package began over the weekend, when Vice President Joe Biden told George Stephanopoulos on This Week that the administration "misread how bad the economy was." Speculation spiked again when Laura Tyson, an Obama adviser, suggested in a speech in Singapore on Tuesday that the first $787 billion stimulus was "a bit too small." President Obama then refused to rule it out: "I don't take anything off the table when unemployment is close to 10 percent and a lot of Americans are hurting out there," he said.

The official administration line is that it's too early to call. "Any discussion of a second stimulus is premature at this point," says spokeswoman Jen Psaki. But everyone else seems ready to have that discussion. "I think we need to be open to whether we need additional action," said Majority Leader Steny Hoyer on Tuesday. House Minority Whip Eric Cantor agreed: "We stand ready and willing to work with the president to produce a bill that will actually yield results."

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From a strictly economic perspective, the jury is still out. Congress passed the Recovery Act six months ago, but job losses continue, with nearly 500,000 jobs shed in June. The unemployment rate has now reached 9.5 percent, the highest in nearly 26 years. That's worse than the administration's baseline job-loss scenariowithout the stimulus. Paul Krugman is now calling for "a second round, ASAP." Dean Baker of the Center for Economic and Policy Research says, "I think we can make that call already." But Mark Zandi of Moody's Economy.com says give it a few more months: The rollout so far, from tax cuts to state aid to infrastructure spending, has been "pretty much what we expected." Former Reagan-administration economist Bruce Bartlett argues it's too soon to double down, since a huge chunk of funds don't get spent until 2010 and 2011.

Politically speaking, though, it's hard to imagine the administration standing pat if jobs continue to hemorrhage. In which case, the question is, what would a second stimulus look like?

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Everyone agrees it would have to be different from the first. Initially, size mattered. This time around, the most important factor may be speed. And the fastest way to get money into American hands is tax cuts. The first round included nearly $250 billion in individual and business tax relief. This time, the portion would probably be even larger. "House Republicans have said from January 1 that any 'stimulus' bill needed to be about the creation, protection, and preservation of jobs," says Cantor spokesman Brad Dayspring. In other words, no temporary construction jobs that last till only 2011. Republicans proposed a payroll tax holiday back in January. Come September, says Zandi, that option might not look so bad.

Another relatively speedy way to jumpstart the economy would be to give more money directly to state and local governments. That money gets spent a lot faster, since the programs it goes to—food stamps, for instance, or unemployment insurance—already exist. Construction projects, by contrast, take a while to plan. That's why less than 5 percent of the money allocated to the Department of Transportation has so far been spent. (That presumably includes the "shovel-ready" projects that began right away.) Giving states money makes sense from a need-based perspective, too. If the downturn continues, state budgets will be at risk of collapse. (See California, State of.)

Other fast-moving ideas are circulating. Baker proposes a tax cut for employers that gives their workers paid time off. With their employees on government-paid holiday, businesses would then be free to use their own money to hire new people, chipping away at unemployment. More jobs, more money, more vacation. What's not to like? Of course, the politics of this plan are difficult, to say the least: The government would be paying people not to work. But Baker reasons that since these private-sector jobs already exist, the hiring—and the stimulus—would happen right away.

Passing a second stimulus would be harder than the first. It would force the administration to make sacrifices to reduce the deficit, like guaranteeing that health care reform is paid for and preventing more home foreclosures. It would also mean the end of the inherited economy. No longer could Obama blame the consequences on the previous administration.

At the same time, however, a second stimulus would help Obama spread some of the blame (or credit) for the economy to the opposition party. For Republicans, a tax-cut-centric stimulus would be a "we told you so" moment—even though some economists blame the failure of the current stimulus on its GOP-driven watering-down. Perhaps that's why the administration is determined to stave off a second stimulus. It would give conservatives their biggest talking point since stagflation.